That’s where John Charcol can help. Our experts can’t teach you how to plaster a wall but we can offer independent and impartial advice on how to pay for your renovations using the equity locked in your home.
In this guide to funding home improvements, we’ll look at what options are available to help you release the equity locked in your property. These options include:
You’re likely to have a budget in mind for your project but it’s important to find out if that’s realistic. Before you start, make sure you get a handful of quotes from tradesmen, look into the materials you want to use, think about any tools you may need to buy for yourself and think about the way you want to furnish the finished product.
Once you’re all costed up, it’s time to find the money. For any project at £10,000 and below, it’s worth considering using your savings, taking out an unsecured loan or even applying for a 0% credit card, if you can get a high enough credit limit. However, if you plan to consolidate these debts into your mortgage further down the track,
you may fall foul of the terms and conditions of your mortgage at that time.
If you’ve got bigger plans, here are your main options for releasing equity from your home to pay for your renovations.
The amount of equity you have depends on the value of your home. It is determined by the current market value of your home less any outstanding mortgage owed. That means if you’ve owned your home for a few years, your home is likely to have increased in value and you could have paid off some of your mortgage meaning you have more equity.
Here’s a simple example to help:
So, you have 10% equity in your home
You’ve also could have paid off some of your mortgage, £10,000 for example - so you’ve still got £260,000 borrowed
As you now have more equity in your home, you could borrow more against it which can help you pay for your renovations.
A good way to think of a further advance is that it’s a top up on your existing mortgage. Unlike remortgaging you’ll stick with the same lender and the terms of your mortgage won’t necessarily change however, you’re likely to end up paying two rates. One rate on your existing mortgage repayments and different rate on the extra money you’ve borrowed.
The rate of interest on the additional money you’re borrowing may be more or less than your existing mortgage and can be fixed or variable. You should make note of when any early repayment penalty period ends, especially if this doesn’t coincide with the end date of your original mortgage product.
If the fixed rate period of your mortgage doesn’t coincide with the fixed rate on your further advance, you will need to be prepared for the rate on one or the other, (and therefore your monthly payments) to change to the standard variable rate. This can be especially important if the larger part of your mortgage goes onto standard variable rate first.
Earlier in this guide we explained what equity is and how it’s calculated. Remortgaging can be a great way of releasing some of that equity to pay for your renovations.
If you remortgage to borrow more, the amount you borrow will be determined by:
A second charge is a form of secured loan and is a different way to use the equity in your home to finance your home improvements. A second charge is similar to having a second mortgage in that it is provided by a different lender. You may choose this option because your existing lender may not agree to lend you the amount you need under your current mortgage arrangement. Alternatively, you may currently be on an interest only mortgage and are unable to borrow any more without major alterations to your mortgage arrangement.
Just like remortgaging, the amount you can borrow on a second charge depends on how much equity you have in your home.
The rate on a second charge may be higher than the rate on your existing mortgage however, it would normally be lower than the rate on an unsecured loan or some credit cards and repayments are often spread over a far longer period of time.
A second charge may be attractive to those who don’t want to lose their current rate by remortgaging but can’t borrow any more from their current lender.